Strong business activity in the eurozone raises the prospect of a rate hike in May

Eurozone business activity expanded faster than expected in April, buoyed by buoyant demand, easing price pressures and rapid job growth that economists say would push the European Central Bank to hike interest rates next month.

The eurozone’s flash HCOB composite purchasing managers’ index, a measure of activity in manufacturing and services, rose for the sixth straight month to an 11-month high of 54.4 in April, up from 53.7 the month. past.

The result was above the flat reading forecast by economists polled by Reuters, indicating that last month’s turmoil in the banking sector had failed to halt the bloc’s economic rebound since the 2022 energy shock.

The survey compiled by S&P Global also pointed to a growing divergence between a recession in the manufacturing sector, particularly in strike-hit France, and a robust revival in the larger services sector.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said that beyond the overall “very good picture” for business activity, growth was “very unevenly distributed” between “partially booming” services and a “partly booming” manufacturing sector. weakened”.

Purchasing managers index line chart showing services growth is driving a rebound in eurozone business

New orders expanded at the fastest rate in a year in services, but fell at the steepest rate in four months in manufacturing. Job growth in the services sector accelerated at the fastest rate in 15 years, while employment in manufacturing increased at the slowest rate in 27 months.

Although companies continued to raise their prices, the rate of increase is becoming more moderate. An index of “sale prices” fell to its lowest level in two years. Utilities, buoyed by strong demand, were able to report “particularly strong” increases in the prices they charged, in contrast to more modest increases from manufacturers.

“Continuing rapid price increases, a still resilient job market, and signs that the economy is holding up to interest rate hikes and tightening credit standards well, increase the chances that the ECB it will tighten more than we expect,” said Melanie Debono, an economist at the research group Pantheon Macroeconomics.

Germany’s two-year borrowing costs, which are sensitive to interest rate expectations, rose after the PMI survey was released and the euro recovered some losses against the US dollar.

Investors are pricing in an increase in the ECB’s deposit rate from 3 percent to more than 3.75 percent in the coming months. Several ECB rate-setters have said that a decision on whether to continue raising rates by half a percentage point or cut them by a quarter point next month will depend on data, including the central bank’s survey of lenders and the survey of April. inflation – both due early next month.

Official figures to be released next Friday are expected to show the eurozone economy returned to positive quarter-on-quarter growth with an expansion of 0.2% in the first three months of the year, compared to a flat close last year. .

Rory Fennessy, an economist at Oxford Economics research group, said: “The preliminary PMI indices for April pose further upside risks to our near-term GDP forecasts across the region.” But rising borrowing costs still point to a “weaker outlook” in the second half of the year, he said.

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